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That raucous roar heard over Wall Street last week wasn't joyous New Year's Eve revelers. It was the stock market launching itself skyward.

U.S. politicians again managed to put off some difficult decisions, but, as 2012 closed, they made enough on tax issues to send stocks up by 4%-5% in one of the best market weeks in a long time. Small stocks outperformed their big-cap counterparts, and "risk on" replaced "fiscal cliff" as the market's watchwords.

The fiscal cliff can now be put in the dust bin of history, but there's plenty more politicians must accomplish over the next two months on the U.S. debt ceiling and on potential automatic government spending cuts. But let's not worry about that until February.

Last week, the Dow Jones Industrial Average soared 497 points, or 3.8%, to 13,435.21, while the Standard & Poor's 500 stock index jumped 64, or 4.6%, to 1466.47, a five-year high. Just one S&P industry group out of 133, managed health care, fell last week, losing 1.2%.

The Nasdaq Composite gained 141.35 points, or 4.8%, to 3101.66. The Russell 2000 index of small-caps hit an all-time record close of 879.15, up 47 points, or 5.7% last week.

Though the proximate cause for the big rally was Washington, "it was more than that," says James McDonald, CIO at Northern Trust. Manufacturing surveys in the U.S. and many emerging-market countries suggest that the recent global economic momentum is continuing to gather steam, he says. U.S. employment data released last week were also supportive of additional economic growth, he says.

The only down note of the week was Thursday's release of Federal Reserve minutes from the December policy meeting. They suggested some members of the Fed were in favor of slowing or ending its Treasury bond-buying programs.

"For the first time in a while, the stock market is discovering the Fed might take away some of the interest-rate stimulus," says Peter Jankovskis, co-CIO at Oakbrook Investments.

Rising interest rates might become a problem for equities down the road, but the market's near-term horizon, at least until late February, seems pretty clear. Fourth-quarter earnings reports will soon come out, but they appear unlikely to change the market's direction.

By March, those difficult debt-ceiling and spending-cut negotiations will be in full swing and more decisions will have to be made. "It could get stormy as we get closer," adds Jankovskis.

THE WORLD IS SWIMMING IN DATA and every year the pool expands. Around the globe, each time someone makes a mobile phone call, downloads a movie, or buys a product online, among many other computer-aided activities, somebody somewhere stores that data.

Studies suggest this trend is long-lived and will grow exponentially in the next decade. In one of the latest, released last month by research outfit International Data Corporation and sponsored by
EMCEMC 0.15673981191222572%EMC Corp.U.S.: NYSEUSD25.56
0.040.15673981191222572%
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11661171AFTER HOURSUSD25.56
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Volume (Delayed 15m)
:
175712
P/E Ratio
19.074626865671643Market Cap
50448573658.8249
Dividend Yield
1.7996870109546166% Rev. per Employee
348586More quote details and news »EMCinYour ValueYour ChangeShort position
(ticker: EMC), the "digital universe"—including each electronically stored piece of data—will double about every two years from now until 2020.

By then, IDC wrote, there will be more than 5,000 gigabytes for every man, woman, and child in the world. One GB equals 1,024 megabytes and can store roughly 230 songs in MP3 format or 600 photos. Just as a century ago, the new automobile owner couldn't expect the future would bring cigarette lighters and GPS displays in every car and truck, no one now really knows where the digital data highway will lead. It's relatively certain, though, that more and more data will be used and stored.

This should put into perspective the short-term head winds buffeting the stock of that same EMC, the giant provider of enterprise storage systems hardware and software. After hitting a high of $30 in late March, its shares have significantly underperformed the stock market, down 15% while the market is up 4% over the same period. Friday the stock closed at $24.33.

Analysts are expecting non-GAAP 2012 full-year earnings of $1.68 per share from EMC, which the company reaffirmed in it third-quarter earnings report. In the first nine months, EMC revenue rose 9% to $15.7 billion and diluted EPS gained 11% to 82 cents. In 2011, EMC's EPS was $1.37.

Despite those issues, investors should take a closer look at the long-term data trends, says Channing Smith, the co-portfolio manager of the Capital Advisors Growth Fund, which recently added to its stake in EMC. The explosion of storage over the next decade will be attractive to an industry leader like EMC. That rise should stand up in most any economic environment, he adds.

While storage growth has slowed, Smith says, the company, through recent acquisitions, is moving into higher-margin areas like business intelligence and analysis. In any event, through the use of mobile devices, video, and electronic record keeping, storage demand will still remain strong.

It's a blue-chip company with a solid balance sheet, and a track record of steady and robust EPS and revenue growth in nine out of the past 10 years. EMC also owns a 79% stake in
VMWare vmw -1.1689563750301277%VMware Inc.U.S.: NYSEUSD82.01
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578821AFTER HOURSUSD82.0025
-0.00750000000000739-0.009145226191927813%
Volume (Delayed 15m)
:
6251
P/E Ratio
39.810679611650485Market Cap
35483659827.0529
Dividend Yield
N/ARev. per Employee
335278More quote details and news »vmwinYour ValueYour ChangeShort position
(VMW), a fast growing maker of virtualization software that makes more efficient use of storage capacity.

The shares are cheap, Smith says, noting that the stock trades at less than 13 times consensus expectations of $1.92 per share this year.

On both a price/earnings valuation and the ratio of enterprise value (market value plus net debt) to earnings before interest, taxes, depreciation, and amortization, EMC stock is near 15-year lows. Back out the roughly $5 per share in cash (which includes VMWare cash) on the balance sheet at third quarter's end, and the P/E is more like 10 times, far below its historical median.

Now that the U.S. government has addressed the fiscal cliff, there might be a catalyst in the way of improved capital spending in the second half of 2013, Smith says. He believes EMC shares can rally back to $30, or 20% higher, this year and possibly more depending on second-half capital spending.

Waiting for the fourth-quarter results might be a more conservative way to play EMC, in case an even cheaper price presents itself, but the stock looks attractive even at the current level.

Transocean agreed to pay $1.4 billion to settle with the Justice Department any civil and criminal claims related to the Gulf of Mexico explosion at BP's Macondo field, which resulted in the nation's largest offshore oil spill. Transocean shares, which climbed 6.4% on the news and 17% on the week to $51.82, have more room to appreciate as the taint of litigation fades, and if its rigs can fetch higher prices as their contracts are renewed.

The DOJ settlement, much of which can be paid over three years, means investors now have more visibility into Transocean's cash flow, and the stock's discount to the company's net asset value should shrink, notes Jerry Furciniti, a portfolio manager at QCI Asset Management, who was bullish on the shares last month when they changed hands at $46.20 ("Ready to Rise From the Depths," Dec. 3, 2012).

If the world economy grows modestly, he believes the shares could trade up to $75 by the end of this year, or roughly 12 times the $6.19 of earnings per share analysts expect in 2014.

Transocean still faces civil claims, but its BP contract includes indemnification for pollution resulting from below the water's surface. Transocean has a $2 billion reserve for legal matters related to the Deepwater explosion.

THE NEWS ON TRANSOCEAN, with its poorly performing stock in recent years, leads us to other underdog stocks. These are the shares of companies so hated and with expectations so low that it wouldn't take much in the way of good news to get a nice return.

These stocks have done poorly for more than a year—for some, as much as five years.

There are times when there is so much pessimism that the share price gets away from the stock's normal relationship with expected earnings growth, he says. "In these cases, there are a lot of negatives around, and investors just leave the stocks," he adds.

For each of the five following stocks, investors must ask why the stock is behaving so poorly. Balter did and studied whether the profits—both past and expected—rose or will rise faster than the share price, and the answer is "Yes."

Oil giant BP, which was at the center of the Macondo tragedy, has "tremendous" earnings power and is one of the cheapest names in the oil-majors group, he says. It trades at 7.7 times 2013 consensus estimates. "There's a lot of dead weight and baggage, but it's behind the stock now," Balter adds. BP closed at $43.66 Friday.